Investors often overlook SEC filings, and it is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots,'(depreciation policies, warranty reserves, and restructuring charges, etc.)that may materially impact Quality of Earnings.

Wednesday, October 24, 2007

Millennium Cell -- Running on Empty Fuel Cells

Millennium Cell Inc. (MCEL-$0.62), which is developing hydrogen battery technology for portable applications (such as off-grid power supplies, portable charging docks for small electronics, and laptop personal computers) said it exchanged equity with Singapore's Horizon Fuel Cell Technologies Ltd. as part of an agreement to jointly develop and sell hydrogen fuel cell products on a global basis.

"This agreement with Horizon adds a new dimension to our business model," commented Adam P. Briggs, Millennium Cell President. "The objective is to generate product revenues for both Millennium Cell and Horizon in 2008."

The two plan to start selling a 50-watt emergency power unit in 2008, with additional hydrogen battery products for consumer and military use to be launched in 2008 [soldier power applications] and 2009 [unmanned aerial surveillance].

Strategic Initiatives

Millenium’s primary business model is to partner with various fuel cell companies and to integrate its proprietary Hydrogen on Demand technology to form a complete power source solution (to safely store and deliver hydrogen energy in a “battery” sized package, which will provide longer runtime and lighter weight in a compact space) for device manufacturers and consumers.

In pursuit of its strategic goal, Millennium—to date—has allied with several other fuel cell companies, including strategic relationships with Jadoo Power Systems (entered into February 2005), The Dow Chemical Company (April 2005), and Protonex Technology Corporation (in 2003).

Brigg’s good faith comment was but the latest in a series of promises suggesting that Millennium was accelerating its path towards product commercialization(s).

Promises are like the full moon, if they are not kept at once they diminish day by day. ~ German proverb

For example, in Millennium’s 2006 Annual Report, Briggs and CEO H. David Ramm told shareholders to expect “[initial] shipping of Protonex Corporations ProFuel C720 fuel cartridges [targeted to replace military battery applications] and fuel cartridges for Jadoo Power Systems products like the XRT [designed to provide emergency power in the field for first responders to charge radios and power other critical devices] and the IFS24 power module [a military radio power source] in the first-quarter 2007.”

Field trials of Jadoo’s XRTFuel Cell Power Units utilizing Millennium’s hydrogen fuel cell cartridges are now expected in 4Q:07.

A half-truth is usually less than half of that.

Investors ought be mindful that initial shipments are only for prototype testing purposes.

The Company has yet to attain any industrial OEM product commitments of any substance, due to delays in development of its ‘solid state’ hydrogen battery technology.

Research & Development Issues

Management believes that the promise of hydrogen fuel cell technology has not yet been fully realized because of numerous engineering design challenges that have resulted in system complexity and increased cost. A fuel cell requires air to operate and the temperature, humidification, and flow rate of the air are critical factors in the fuel cell’s performance. For these reasons, designers of fuel cells have had to add additional components to control these three variables. As a result, most of the space required by small portable fuel cell power systems is comprised of what is commonly referred to in the fuel cell industry as “Balance of Plant” or “BOP”.

BOP consists of pumps, fans, valves and other devices that are used to control the movement of liquid fuel, airflow, temperature, and humidity. To greatly reduce the cost and challenge associated with commercializing fuel cell systems, the Company’s fuel cell design eliminated the mechanical BOP and replaces it with a proprietary electronic control system, thus reducing cost and system complexity by eliminating pumps, fans, and compressors.

Nonetheless, the end goal is to reduce the total manufacturing cost in order to compete with current market technologies, including the separate families of chemical-based battery technologies (including, alkaline, nickel-cadmium, and lithium-ion).

Financial Outlook

The monthly cash-burn rate was $600,000 and $1.1 million, respectively, in fiscal 2006 and for the 1H:07. Management previously called for a reduction in its cash-burn to about $542,000 per month in fiscal 2007.

Given current cash and cash equivalents of approximately $7.5 million, we believe Millennium should have sufficient liquidity to satisfy anticipated cash needs through the 1Q:08.

As of June 30, 2007, Millennium had an accumulated deficit of $(113.6) million.

Investment & Risk Considerations

Most investors in fuel cell stocks could care less—nor even understand—that fuel cells are different from batteries in that they consume reactant, which must be replenished, while batteries store electrical energy chemically in a closed system. Hydrogen fuel cells take in hydrogen-rich fuel (H) and oxygen (O) and turn them into electricity and heat: or, “H-2(g)+ 1/2 0-2(g)-> H-2O”. The waste product is water.

The ultimate metric investors ought to consider when making the decision to buy Millennium Cell common stock is acceptance of product in the energy storage space—military applications being the first to reach prototyping timelines.

They're running on their worst defense,defenses.They're running on their worst defense,defenses.

As discussed, however, until the Company can work through technological feasibility issues and economic/manufacturing costs, management will continue stumbling to find a footing in a competitive market, which includes traditional batteries (which convert chemical energy to electrical energy) and other fuel-cell initiatives (such as, Zinc-air, Proton exchange membrane, and Direct formic acid).

No light,Guides you.Leads you on.Blinds you.

The fact that the market valuation of Millennium Cell was composed of promises rather than actual product performance—or the attainment of previously specified timelines—illustrates why the share price has lost about 49 percent in value over the last 52-weeks.

The voice that cracks the latest pressure.Chips, their finest phrase that pays youOff, with hands you cant depend onFor the best defense. ~ Archers of Loaf (All The Nations Airports, #4. Worst Defense)

The 10Q Detective does not see any BUY catalysts on the event horizon.

Editor David J. Phillips does not hold a financial position in any of the companies mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

1 comment:

Anonymous
said...

Very interesting comments. I have a few questions regarding your Research & Development section. When management discussed the issue of Balance of Plant, were they referring to the power module half (fuel cell) or the energy module half (fuel cartridge) or both? Does the company’s proprietary electronic control system help eliminate the mechanical BOP on the fuel cell half or the fuel supply half?

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Prior to founding the 10Q Detective, I held equity analyst positions with three brokerage firms and published the investment newsletter e-Growth Profit Letter - dedicated to uncovering companies with innovative, proprietary technologies in a range of industries. My work has been published in The Dick Davis Digest, The Bull & Bear Financial Report, BusinessWeek, CBS Interactive, Forbes, Kiplingers Personal Finance, MSN Money, TheStreet.com, 24/7 Wall Street, The Wall St. Journal, The International Herald Tribune, and Investors Business Daily.
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